retirement funds

Why Saving Too Much Money for a College Fund Is a Bad Idea

Mikey Rox — Thu, 30 Mar 2017 08:30:15 +0000

If you have children, you may have a 529 education savings plan set up. While it's helpful to save for your kid's college education in advance, there are downsides to saving too much. Here are a few reasons you may want to adjust your contributions and/or revise your college fund strategy.

1. You may make more financial sacrifices than necessary

Unless you're loaded, you're probably making concessions elsewhere in your budget to keep up with contributions to your 529 — but at what cost? Are you neglecting other necessary payments, like credit card debt, resulting in additional fees? Are you compromising your health by reducing your visits to care providers? Do you have a sufficient emergency fund?

Saving for your child's college education is important, but don't put it before any immediate needs. Paid-in-full college tuition is a luxury and privilege, and it shouldn't be your top priority if other aspects of your personal life and finances are affected.

2. Your retirement fund will suffer

If you're putting your child's paid-in-full education before your own later-in-life needs, consider this: You can take out a loan for education, but you can't take a loan for retirement. Millions of students have furthered their educations on their own dime and lived to tell the tale, because they're in perfect condition to work it off after they're spit out into the real world. You, however, may be nearing the time when you may not want or physically be able to work as your kid goes off to school, and that could wreak havoc on your financial future.

"If you devote the majority of your family savings to fund college education out of pocket, be prepared to push out your retirement goals," says registered investment adviser Ryan Miyamoto. "By the time you are starting your family, you are usually thinking about getting serious with your retirement savings as well. These goals end up competing with each other, and with the rapid cost of college education, your retirement will suffer."

3. You're missing out on tax-exempt withdrawals of your 529 plan

Conservative investors miss out on the biggest benefit of 529 savings plans — tax-exempt withdrawals. Since tax-exempt withdrawals are only applicable to the gains, if you're using a 529 account to save for college and invest conservatively, your gains will be minimized compared to a growth investor. Having education as a top priority adds fuel to the fire of being conservative; you don't feel like this is your money, but rather your kids', so you irrationally think you want to minimize losses.

Adds Miyamoto, "Conversely, if these same individuals were to invest their savings into their own 401(k), the mentality changes; they're willing to take more risk since they view it as their own money."

4. You will have to pay sizable penalties if your 529 isn't used

You probably have an idea of how much you need to save for your child's education when you open your 529 plan, but whatever that number, it's still just a rough estimate. Your kid may need more than what you think college may cost at his or her time of birth, based on inflation 18 years later plus their choice of college. Let's hope the latter doesn't break the budget — but it probably will.

On the other hand, if you funnel too much money to the account and it goes unused — for instance, if your scholar attends a relatively inexpensive school (which is normally good news, but not in this case) or decides not to attend college at all — you're going to kick yourself for not being a little more selfish with your money.

"If you overload a particular savings vehicle for college, you run the risk of actually being financially penalized," explains certified financial planner Greg Knight. "For example, if you save too much in a 529 savings plan without having a drawdown strategy, you will incur income tax and a 10 percent penalty on the earnings portion of withdrawals not used for qualified education expenses. In general, distributions from 529 plans are not taxed provided they are used for qualified educational expenses. However, if you have paid all expenses and still have funds left, as the parent account owner you need to either name yourself as beneficiary and attend a qualified educational program to use the funds tax-free, or have another child or grandchild to name as a beneficiary."

With 529 distributions, a portion is tax-free (as basis) and a portion is taxable (as earnings) unless the distribution is used to pay qualified educational expenses. Without knowing in advance who will use the 529 funds until they are depleted, you run the risk of paying tax and a 10 percent penalty.

5. You don't know if your kid will go to college

Another issue with putting too much cash in one basket is the variable of whether or not your kid will go to college at all. Once they're 18, you can't really make them do anything (unless you're holding financial support over their head), and, let's face it: College isn't for everyone. Having this fund might place undue pressure for them to do something they don't really want to do.

6. Your kid might not appreciate your sacrifice

I'm not suggesting that you shouldn't save for your kid's college education, but perhaps you shouldn't foot the entire bill. At the very least, refrain from telling them how much money is actually available. Plenty of parents want to pay their kids' way through college so they can enjoy the full experience, but that's really just providing them with an excuse to avoid taking on adult financial responsibilities. They may not truly appreciate the value of their education (nor your many years of saving) if they don't have to work for at least part of it themselves.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

This Is the Basic Intro to Having a Retirement Fund That Everyone Needs to Read

Damian Davila — Fri, 16 May 2014 08:24:40 +0000

Planning for retirement should be on your mind.

50% of Americans state that having enough money for retirement is their top financial goal. However, there is still room for improvement. Back in 2011, 25% of individuals age 46 to 64 reported having no retirement savings at all.

You cannot expect social security to cover all of your expenses during retirement, so you need to build a nest egg that supplements your income. It is time to take action and jumpstart your retirement planning. Here are some great tips to start your retirement fund and maximize the time you have available.

Start a Retirement Account

No matter at what point in life you are, you need to start a retirement account if you don't have one.

If you are far away from your retirement days, you should consider a retirement account that allows you to defer taxes (e.g. 401(k) and traditional IRA) until retirement age. You are most likely to be in a lower income tax bracket when you retire. Plus, your taxable income is effectively reduced every year!
If you are in your 50's, then you should look into a 401(k), 403(b), SARSEP, or 457(b). With these type of retirement accounts, individuals age 50 and up can make $5,550 in catch-up contributions in 2014.
If you know that you are very likely to be in a higher income tax bracket during retirement, then you would benefit from opening a Roth IRA. By contributing with after-tax dollars, you take the IRS hit upfront.

How to decide what you need? Learn about your retirement account options, and then see a financial professional.

Maximize Your Contributions

You need to not only commit to fund your retirement account, but also to maximize contributions every year. The IRS sets limits as to how much you can contribute each year, so every year that you don't meet that limit you are reducing the potential size of your nest egg.

Also, take advantage of employer-sponsored retirement programs. As many as 90% of workers participating in a company retirement plan save for retirement, while only 20% of those without one do. If your employer offers a retirement matching-program, take advantage of as it will help you maximize your contributions faster.

And Beware of Limits

It is important to keep an eye on your contributions so that you do not exceed the annual limit set by the IRS. For example, the ceiling for 2014 contributions for a 401(k) in 2014 is $17,500 ($23,000 for those age 50 and up). It is your responsibility, not your employer's, to check that you don't exceed the contribution limit. The deadline to take out excess contributions is the day before filing your federal taxes, otherwise you will face stiff penalties from the IRS.

Take Control of Your Debt and Build an Emergency Fund

In 2014, 58% of workers and 44% of retirees report having problems with their levels of debt. If a big chunk of your paycheck is going towards monthly credit card bills and loan payments, this means that you are likely to have very little, if any at all, for your retirement accounts. Remember that if you want to be able to maximize your contributions, you need to have money left at the end of every month.

Life happens, so you need to be ready for those rainy days: Get started on your emergency fund!

Balancing a retirement account, an emergency fund, and a debt payment plan can be a bit overwhelming, but with some planning (and dedication), you can do all three.

Designate a Beneficiary

An often overlooked step in retirement planning is filling out the beneficiary form for your retirement accounts. If there is a specific way that you would like to allocate your retirement account in case you pass away, then it is critical that you fill out the beneficiary form. This will it make easier for your beneficiaries in case of a probate.

Consider Semi-Retirement

With life expectancy reaching 84 for men and 86 for women, the reality is that you might become bored if you retire at 65. There are physical, social, and mental benefits to staying in the workforce past age 65.

There are three main financial benefits of semi-retirement.

First, Social Security will grant you delayed retirement credits if you wait until full retirement age 70. This maximizes your monthly Social Security checks in the future.

Second, you can delay taking withdrawals from your 401(k) plans until full retirement age.

Third, it buys you extra time to reach your retirement goal. This last one is particularly useful if you got a late start on your nest egg.

It's Never Too Early — or Too Late — to Start

It is never too early or too late to start a nest egg, but you need to have a plan. By laying out a strategy, you are more likely to maximize your contributions and meet your retirement goals. Remember that it ain't over till it's over! The time to start your retirement account is now.

What is keeping you from saving for retirement? Let me know in the comments below.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: